Reda Cherif, Fuad Hasanov, and Min Zhu
Published Date:
April 2016
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This is an edited and abridged version of a conversation between His Excellency Minister Muhammad Al Jasser, then Minister of Economy and Planning of Saudi Arabia, and Min Zhu, IMF Deputy Managing Director, following the diversification conference that took place in Kuwait on April 30–May 1, 2014. The discussion was moderated by Alfred Kammer.

A Conversation on Diversification Challenges

MR. KAMMER: We had a very rich discussion over the last one-and-a-half days, setting out a number of elements that are important for oil exporters to diversify their economies and to create sustainable non-oil growth. We heard from academics about the important elements of a development strategy. We heard from policymakers about case studies of what worked and what did not work in particular countries.

It is now a great opportunity to hear from a policymaker from the region, who has been designing and implementing development strategies and diversification agendas, Minister Al Jasser, and from Min Zhu on the IMF’s global perspective on these issues.

We heard that the GCC region has made great progress in terms of human development. But we also heard that its relative economic performance fell. The non-oil sector expanded and became more diverse within the nontradable sector, but at the same time, total productivity growth declined and became negative. One of the main elements coming out of the conference was a strong drive in successful countries to develop the tradable sector. Why is the tradable sector so important for a successful diversification strategy? What does it actually bring to sustainable growth in the long term?

MR. ZHU: Diversification is very much a process, and the tradable sector plays a very important role in this process. When we talk about diversification, we talk about industrialization, and there are a few important elements. First, we have to stick to a market-based approach where market signals are not ignored. This approach allows us to introduce competition in international markets. The tradable sector plays a very important role in bringing international competition to the local market. We need to let the local economy and local companies compete with international companies. The tradable sector transforms skills and experience, and drives the process of climbing the “quality ladder” in the local economy.

It is also very important to facilitate improvements in productivity. When we talk about diversification, the key issue we learn from the global experience is that sustainable growth is very much driven by a sustainable increase in productivity. The tradable sector contributes most to the sustainable productivity increase. Many studies show that in the tradable sector the productivity increase is much larger than in the nontradable sector. I think one explanation has to do with introducing international competition.

When we talk about diversification, we need to think about opening up the economy, using a market-driven approach, introducing international competition, and expanding the tradable sector.

MR. KAMMER: So open up and the tradables will come. From the experiences that seem to have worked in some countries, there is a role for the government to come in to support vertical and horizontal diversification and to create clusters of knowledge.

The GCC, including Saudi Arabia, have worked along these lines to jumpstart the tradable sectors. Economic cities were created; certain industries were targeted and supported; and entrepreneurship through the establishment of small and medium enterprises was given full support. Yet, the tradable sector has not emerged in full force.

What is your experience in Saudi Arabia? What is working? What are the lessons to take away and the obstacles you are running into in developing the tradable sector?

MR. AL JASSER: Let me take a step back and look at this issue from an historical perspective. The initial conditions and the cultural setting cannot be overlooked. Otherwise, the development strategy and processes will invariably face significant obstacles.

Before the 1970s, the GCC countries were very underdeveloped. In the early 1970s, life expectancy in Saudi Arabia—and I think probably for the GCC as a whole it was not much different—was about 53 years. Now, it is 75 years. We have come a long way, and that is a product of education, health care, awareness, better food, and many other developments.

We were totally dependent on the export of crude oil, and people started saying, well, that is not enough value-added. We moved into refining and extracting. As a result, other ingredients of the development process came along—training, expertise, knowledge transfer and accumulation, and sophistication of the labor force and a large share of local workers in these industries. For example, Aramco has about 85 percent to 90 percent local workers.

We continued in our approach of expanding value-added activities. We were flaring associated gas that was coming out of the ground during the oil extraction. The government, out of its own budget, initiated a gas-gathering project, which was implemented by the government rather than the oil company. The gas was gathered, and that is how SABIC [the Saudi Basic Industries Corporation] and the petrochemical industry were born. This is another stage of development, and with all the associated activities, learning and the transfer of knowledge were made possible. Yet, as SABIC was created in 1976, we did not start very early on to take the production process further down the value chain as much as we could have. The secondary industries that could have sprung out of this venture decades ago did not. Now we are catching up. The government established a new corporation for industrialization. Its task is to take the products, the basic products of SABIC and others, and see how to go further down the value chain.

Over the years, diversification has taken place but of course, it is not enough. Leaving oil exports aside and looking at non-oil exports, even though there are petrochemicals in there (which is still manufacturing industry), the growth rate of non-oil exports has been about 17 percent per year since 2001, growing from 31 billion riyals to 204 billion riyals at end-2013. This is an important achievement.

Coming back to the main question, why do we want tradables and exports? Take our non-oil exports as a ratio of our imports. How much of my imports can I finance through my non-oil exports? It has risen to 34 percent of our imports from about 25 percent in 2001, even though our imports have increased substantially.

In a way, the governments in the GCC have tried to emulate The Entrepreneurial State, the title of the recently published book.1 I think this is a concept that has been applied in the GCC. The governments have felt that one way to deploy large revenues from oil, or from the other extractive industries, and how to use them more effectively, was to push the development process much faster. We are trying to build the downstream industries, where there are higher value added, employment opportunities, and diversity of knowledge, expertise, and management skills that can be transferred.

I will mention another example of the entrepreneurial state. In Saudi Arabia, we did not develop our mineral resources except oil. Now, the Saudi Mining Company, created only about 10 years ago, is developing huge deposits of phosphates in northern Saudi Arabia, and bauxite for aluminum in the central region of the country. We have built, for the first time, a huge railroad network to transfer the ore from the mines to a new seaport on the east coast to refine those products—phosphoric acid fertilizers, and aluminum with all of its varieties—and ship them to markets, particularly in Asia. Out of this initiative, we see a potential development of the auto industry cluster. Why do we think so? We will produce a special type of aluminum that can be used for the car body at a very reasonable cost.

We are now riding this wave of industrialization and the development of tradables. We are trying to bring in foreign direct investment, not because we need capital, which is the case in many other countries, but because for us, it is the transfer of knowledge and expertise.

One final point I will say on the challenge we have faced all along—and this may be peculiar to the GCC countries—is that we have relied, particularly in the private sector industries, on foreign labor. My concern is not remittances but the brain drain that leaves the country as the accumulation of knowledge that occurred in our lands is gone after the contract expires. We go back to square zero. It is critical that we start accumulating knowledge. It is not the leakage of money that is significant but the leakage of expertise and the accumulation of knowledge. This is where we need to concentrate.

Diversification is not an end in itself; it is really the accumulation of knowledge that will make us, as societies, more self-reliant, with time, on our local labor force. Nothing can happen overnight. In order to ensure that we become knowledge-based societies, all the knowledge that we acquire, or that passes through our countries, our institutions, and our factories, does get accumulated in the country.

Tying this point to productivity, to my mind, the most important element of productivity is the knowledge content. The knowledge content is not only technical skills, but also is the work ethic, the discipline, and all of the elements that make a person and the labor force productive. Only through our own labor force can we achieve this productivity growth. If we achieve it, then diversification will become a by-product of this process.

MR. KAMMER: I think this is a very important point—accumulating knowledge, improving skills, and building up human capital—and we will come back to it. On the role of the state, usually we see that the role of the state is to create a climate to let the private sector flourish and correct market failures. How much should the state be a venture capitalist?

MR. ZHU: What we learned from the examples of Algeria, Brazil, Malaysia, South Korea, and Singapore, we see there is a role for the state to play. Yet this role of the state has also been evolving over time. I feel, today, it may play a slightly different role.

The typical prescriptions we give is to provide the enabling environment for the market—physical infrastructure, the legal framework, tax policies, incentives, education, etc. These elements are important. Yet I would say that in addition to this list, since we are not starting from scratch, other issues have also become relevant.

With the role of the state to promote diversification and sustainable growth, the first issue is reform, that is, to clean the house. For example, whether the government is able to manage the wage bill for the public sector is absolutely important. If the public sector wage bill is very high, it will be very difficult to attract workers into the private sector and to attract the foreign investors in the industries because the best people prefer to go to the public sector. Other issues such as accountability and transparency are important, too. By leveling the playing field, companies can move in to compete with each other.

As to how much the government should play a role of a venture capitalist, it is important for the states to be careful as to what to choose. I would still emphasize the first point is to open the door, let foreign companies into the market, and encourage them to compete with each other. The second point is that even if governments do the planning, the governments could pick the sector or the industry, but not winners. The government is not in a good position to sort out winners.

In addition, talking about this role of a venture capitalist, it is not about funding the industry; rather, it is about funding entrepreneurship. If the government can spend resources and design policies to facilitate and promote entrepreneurship rather than pick a sector, it will make the development process even better.

In today’s world of the Internet and globalization, countries can tap the world markets, access the global knowledge, and attach to the supply and value chains. The government has to be careful in picking sectors and should let the market play a role.

MR. KAMMER: So pick a sector, but be careful. Did Saudi Arabia go further as a venture capitalist?

MR. AL JASSER: I mentioned the examples such as the Saudi Mining Company, SABIC, the new industrialization company, the clusters program we have initiated, and the auto industry. The government is playing an entrepreneurial role, particularly since many of these companies will be IPOed and privatized. In fact, this is what happened—for instance, SABIC has been IPOed.

We claim in the GCC that our economies are market economies, even though there is a role for the entrepreneurial state. One of the most significant roles of the state is setting and enforcing regulations. Regulations need to be transparent, understood, and anti-monopolistic. In Saudi Arabia, we have a competitiveness council that has been reorganized, and now it is pushing the issues of anti-competition and anti-monopoly practices. It should evolve, with time, to become a significant landmark in the regulatory framework of the country.

The government has also started shifting, at least in terms of discourse, away from the employer of the first resort, and we now hear more about entrepreneurship. Every one of our sons or daughters should not think first of having a government job, or just even a job. They should be thinking, “Can I create a job for myself? And, if I do, can I create jobs for others?” This change in the state of mind is very significant.

The role of the state is significant in many ways, not just in picking winners or sectors, but also creating clusters. The clusters program does not comprise only basic industries or petrochemicals, mining from bauxite and phosphates or fertilizers and the like, but also the auto industry. Its linkages—let’s say, spare parts and the other components that go into this industry—are very much needed in other industries. Until there is the connectivity with other industries within a society, there is no cascade effect that is going to push the economy to higher levels of productivity, of competitiveness, and hence—not as a target but as an outcome—of diversification.

MR. KAMMER: You mentioned the importance of changing the mindset, of bringing out the importance of entrepreneurship. One of the issues the GCC countries are struggling with is that wages in the public sector are very high, and therefore they make it very difficult for nationals to go to the private sector and participate in this tradable sector revolution. What can we do about it?

MR. AL JASSER: In fact, if you ask those that are very educated and very skilled, they no longer want to be in the government. We have problems attracting very qualified citizens to work in the government. In a way, it is a positive development because many of them want to be entrepreneurs or work in the private sector. At the lower level of qualification, the attractiveness of the public sector is still high. The new labor ministry is going to examine how to rationalize the labor market on a market-based methodology. For instance, the Nitaqat system is a market-based system. Every sector was examined for local versus foreign labor, and a line was drawn, below which companies would need to catch up to increase the share of local workers. This has resulted in a lot of catching up and even the average Saudization ratio has started rising. In the next round, we are going to start looking at wages. The more productive the worker is, then the higher will be the premium paid by the employer and by the government, and workers will have market-based incentives to be more productive and to be more engaged in the labor market.

MR. KAMMER: A recurring theme is building up human capital. The theme of the tradable sector, the knowledge gained, and keeping the knowledge in the country comes from the production side. On the education side, it is about the importance of good and broad primary education, open and competitive education at the university level, and perhaps even sending people abroad to get the knowledge. Saudi Arabia has been doing a lot on this front. About 180,000 students have been sent outside the country to study. What have your experiences been?

MR. AL JASSER: We reached 185,000 students all over the world, in the United States, Canada, China, Korea, and Europe. But there was also a push on the other front, universities within the country. Now we have 30 public universities. All of the new universities emphasize basic sciences, medicine, engineering, IT, and business administration.

The discourse on education within our society is changing. It is no longer, “Oh, my son or daughter knows how to read and write.” Rather, parents are asking schools: What problem-solving skills and critical-thinking concepts do you teach our kids? I recall Paulo Freire in his book, The Pedagogy of the Oppressed, talking about how dialogical education is very important. This is what we need. Modern education should help our kids develop skills that will make them proud of themselves and also make them productive in the society. We have a very young population (61 percent of the population between ages 15 and 64 and 35 percent below age 15). We have a national labor force that is entering the market that needs to be accommodated. We as the government cannot fall into the trap of trying to create jobs to take them in instead of giving them all the skills they deserve and need to be productive citizens.

MR. ZHU: To add a point on education, on one hand, education needs to start early and be broad, and it is the main conduit to train and nurture the generation of tomorrow. It should be more open-minded, more creative, and more widely available. I think this has become even more important now. Meanwhile, on the other hand, training is also important to provide the current generation with the skills for today. The two approaches have to go in parallel. We need new generations to become more open and more creative. We also need training for the specific skills and needs of the industries.

MR. AL JASSER: Our work to transition to a knowledge-based society and a knowledge-based economy is far from done, and we need to domicile the knowledge content. The 185,000 students we have overseas, the 30 universities concentrating on basic sciences, the King Abdullah City for Atomic and Renewable Energy, the King Abdulaziz City for Science and Technology, King Abdullah University for Science and Technology, King Fahd University of Petroleum and Minerals, and the Tech Valley next to it, will help us in this transition. In the Tech Valley, foreign companies are setting up shop to develop research, hiring graduates from the Saudi universities, and building up those cadres of basic and applied research. For example, GE is building generating turbines in Saudi Arabia, and we have some of the advanced electronics built by the Saudi Advanced Electronics Company.

All of these efforts are just starting to snowball. We are building up our capabilities to make what we need instead of relying totally on foreign expertise. We are accumulating knowledge. Engineers and other specialists working in the advanced sectors would support this process and even if they leave their companies, they will start new industries or join other industries that are on the cutting edge of technology. The knowledge accumulation process and the process of domiciling the knowledge is taking place. We should work harder on getting there.


The Entrepreneurial State: Debunking Public vs. Private Sector Myths by Mariana Mazzucato (Anthem Press, 2013).

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